Collected Wisdom

Hold Wesfarmers, Suncorp and Lend Lease, buy Newcrest and sell GUD Holdings, the newsletters say.

Summary: Wesfarmers is seen by some analysts as trading above its fair-value estimate, but remains a hold. Gold miner Newcrest is regarded as undervalued at current levels, while analysts rate GUD as a sell based on the tough market for household appliances.

Key take-out: At around $38, Wesfarmers’ shares are regarded as being quite expensive by the majority of analysts following the company.

Key beneficiaries: General investors. Category: Portfolio management.

Wesfarmers (WES)

One of the great Australian success stories, Wesfarmers has just come out with another solid set of numbers for second-quarter sales. And while its lofty share price is a bit of a worry, the newsletters for the most part believe it’s not time to sell just yet. Also see Ian Verrender’s recent article, Reading between the broker lines.

The conglomerate’s latest figures highlight the benefits a diversified operation can bring. Coles was the champion of the group again, with Wesfarmers attributing continued growth to improved quality, service and value for the customer. Unfortunately, while its retail division, including Coles, Bunnings and Kmart, is still performing strongly, the same can’t be said for its coal business.

Coal production at its Curragh mine came in 6.4% lower than the previous corresponding period, at 2.67 million tonnes. The fact that coal prices are still depressed, combined with the reduced production guidance given by Wesfarmers for the year, has some worried, and it is something to keep an eye on. But it’s not enough of a reason to sell, given the company’s operations for the most part are centred around the retail sector, the newsletters say.

The share price on the other hand, is a major concern. At around $38, it’s significantly higher than the fair-value estimate given by the majority of brokers, which sits at about $35. While most are holding off on a sell call for now, if the price rises much higher, this view is likely to change.

For long-term investors, keen on having a safe-yield stock in their portfolio, hold on to Wesfarmers for now. But keep an eye on that rising share price, the newsletters say.

  • Investors are advised to hold Wesfarmers at current levels.

Suncorp (SUN)

As a Queensland-based insurer, Suncorp is often faced with weathering the effects of the natural hazards that storm across the state during the wet season. This year is no different, with Suncorp catapulted into the headlines as claims began rolling in for the damage inflicted by Cyclone Oswald. The newsletters are mixed on this one, but for some the lure of a special dividend payout seems to be outweighing the risk posed by the insurer’s lack of geographic diversification ... for now.

Cyclone Oswald belted Queensland last month, with mini-tornadoes, torrential rain and high winds inflicting devastation on southern parts of the state. Flood waters have begun to recede, which means Suncorp will receive many more claims than the 4,500 filed so far. But investors are banking on the insurer receiving much fewer claims in the coming half year than the insurer had to contend with in 2010-11, when floods in Queensland as well as the catastrophic earthquake in Christchurch, New Zealand, saw the insurer dealing with an overwhelming number of claims.

Media reports have this week suggested that a special dividend could soon be on the way for Suncorp shareholders, which leads some to believe that holding onto the stock is the right move. The insurer has earmarked $520 million for natural hazards for the financial year, but in the first half, claims totalling just $147 million had been received. If the full $520 million is not required in the second half, the investment press believes the insurer could issue a special dividend sometime after full-year results are disclosed.

Still, it’s important to keep in mind that insurance is most definitely a high-risk sector. There is just no way of predicting what kind of natural disasters can occur in any given year. But, for now, the storm clouds seem to be receding for Suncorp.

  • Investors are advised to hold Suncorp at current levels.

Lend Lease (LLC)

British students will soon find themselves in brand-spanking new accommodation courtesy of construction giant Lend Lease, which has just inked an exclusive delivery agreement with a leading UK developer, Manor Property Group. The newsletters like the look of this one right now, especially for risk-tolerant investors who aren’t solely looking for high dividend payouts.

The latest agreement will see the construction giant design and build up to 40,000 student units across England and Scotland, with the first five projects of 3,500 units to be constructed with a combined contract value of £240 million ($370 million). The plan will then be for Lend Lease and Manor Property Group to deliver a further 36,500 units across the UK. This means that if all units are built the total value of the entire project should be in the vicinity of $4.2 billion.

But Lend Lease isn’t for the faint-hearted. Its exposure to property and construction markets, typically cyclical in nature, means that it can be a risky investment, the newsletters warn. The newsletters are also keen to point out to those looking at the dividend payout that Lend Lease has just confirmed it will be keeping the payout ratio at between 40% to 60% this year. Still, they believe there’s reason enough to hold onto the stock at the present time.

  • Investors are advised to hold Lend Lease at current levels.

GUD Holdings (GUD)

Turns out things aren’t so good at GUD Holdings after all. The appliance manufacturer was kept under the pump since releasing its latest results, as investors took stock of the difficulties facing the company. With competition from home brands heating up, foreign retailers coming into the market and electrical retailer Retravision folding, GUD management must surely be gasping for breath. Keeping this in mind, some of the financial press regard GUD as one to avoid right now.

The group’s half-year results show just how difficult it is to turn a profit in a weaker market. GUD’s net profit in the six months to December 2012 came in at a disappointing $18.2 million, 21% lower than the previous corresponding year. In its Sunbeam and Oates division, earnings before interest and tax (EBIT) fell by 38%, while overall EBIT fell in three of its four divisions. On the other hand, revenue in its industrial division rose 20% to $114.7 million as warehouse distribution numbers for multinationals came in better than expected.

The rise of cheaper, home-brand goods from domestic retailers, combined with the influx of European retailers struggling to make a profit in their depressed home markets has forced Sunbeam to cut its prices in an effort to compete in an already sluggish market. But the newsletters are concerned this will not be enough.

Evidently, GUD is thinking along the same lines. The group has announced plans to try to turn around its consumer/appliance division. The strategy involves a cost-cutting program, while at the same time looking to make savings by pursuing “offshore alliances to build scale.”

The new strategy seems to take its lead from Breville’s strategy that kicked into gear over three years ago. But Breville has the advantage of being the brand leader in the local market, the newsletters say. For those looking for good times ahead, now may be the perfect opportunity to offload this one.

  • Investors are advised to sell GUD Holdings at current levels.

Newcrest (NCM)

Keep the Faith may be a rock anthem from the 1990s but it could also be a fitting mantra for gold miner Newcrest following yet another set of pretty disappointing results. The newsletters think there could be hope for the miner yet, especially for those willing to wait out the rough ride.

Second-quarter production came in below expectations, with just 493,000 ounces of gold and 19,900 tonnes of copper delivered in the three months to December. Combined with first-quarter results, this means that Newcrest has produced 953,331 ounces of gold in the first half. But with full-year guidance of between 2.3 million and 2.5 million ounces, Newcrest will have to play some serious catch-up in the second half. Added capacity from expansions at Cadia East and Lihir will help, but expectations are that full-year production will come in at the bottom of that range.

Cadia and Lihir will be the ones to watch, the newsletters say. If the expansions can help reduce the gold producer’s rising cash costs, lift its output and have a longer mine life, then investors should consider Newcrest as a long-term option. Let’s face it, at $23.26 the share price is well down compared with the highs of 2010-11, when it was trading above $40. But it is a bit of a concern that Newcrest has steadily declined in the past few years as the price of gold has soared.

The group’s plans for the future include starting production at Wafi-Golpu in 2019, which will also contribute to the higher production expected in the long run.

Unreliable production numbers have been a curse for Newcrest, but for the long-term, risk-taking investor, now could be the time to get in on this one.

  • Investors are advised to buy Newcrest at current levels.

Watching the Directors

It looks like Westpac’s Gail Kelly has an early Christmas present in late December when she was granted 58,000 new ordinary shares as part of her entitlement. The shares had a market value on December 21 of $1,511,976. The shares were granted under the terms of her restricted share plan as chief executive officer (CEO). Due to an administrative oversight however, a statement confirming the acquisition was only sent to the Australian Securities Exchange on January 24.

Also in the buying mood was Engenco Ltd’s Dale Elphinstone, who continued his takeover bid for the company by purchasing 78,776,168 shares in the company for a cool $12,074,671.65 through his investment vehicle Elph Pty Ltd. Elphinstone, Tasmania’s richest person, acquired 3,790,913 of the shares on-market and 4,867,302 shares through off-market acceptances received for the takeover bid announced in early December, in which Elph Pty Ltd’s announced its intention to “make an all cash unconditional bid to acquire all of the issued shares in Engenco Limited for $0.18 cash per share.” The remaining shares acquired by Elphinstone were related to a renounceable pro-rata entitlement offer, also announced on December 12.

Meanwhile, John Hughes of Thorn Group Ltd sold 500,000 of ordinary shares in the company to “satisfy tax and other personal obligation.” Hughes, Thorn’s Managing Director, still holds 3.35 million shares in the company, and advised that he has “no current intention to sell any further shares.”

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